s c i s a b Loan 5
THI N G S YOU SH OU LD D O B EFOR E YO U A P PLY FOR A LOA N
Getting a loan WHETHER IT’S FOR YOUR OWN HOME, AN INVESTMENT PROPERTY OR A COMMERCIAL PROPERTY – GETTING A LOAN I S A N I M P O R TA N T F I N A N C I A L D E C I S I O N . B E I N G P R E P A R E D A N D K N OW I N G W H AT LENDERS ARE LOOKING FOR, MAKES THE PROCESS MUCH MORE ENJOYABLE. THIS BOOKLET IS DESIGNED TO HELP Y O U U N D E R S TA N D T H E B A S I C S , S O T H E PROCESS OF BUYING A PROPERTY IS EXCITING AND STRESS FREE.
ONE
Look at your situation through the lender’s eyes
In years gone by, it was fairly straight forward to get a home loan, or any credit product – maybe too easy. But lenders are increasingly being scrutinised for their practices of the past, and as a result, they are more discerning about who they will lend money to. Everyone’s situation is a little different – and of course, nobody’s perfect. However it is worthwhile taking a look at your own situation in the same way that a lender might, to make sure you present the best picture of yourself in your loan application.
LENDERS ARE PARTICULAR A B O U T T H E D E TA I L S Look through your personal papers and make sure everything is in order. In an age of identity theft, terrorism and money laundering, lenders are very particular about proving your identity through formal documents. Do you have the following? >>
An up-to-date driver’s license – with your current address noted
>>
A valid passport with the same name noted as your driver’s license
>>
Documents that show your birth name and any changes you’ve made over time. For example, if your name has changed, can you show the documents that verify those changes (birth certificate, Deed poll, marriage certificate)?
>>
If some of your identity documents include your middle name, or another name you don’t use any more, you may need to formally change your ID documents so they all have the same name.
>>
Utilities notices (electricity, gas etc) or other documents to show where you are currently living.
W H AT ’ S Y O U R C R E D I T HISTORY LIKE? There are many lenders that will offer loans if your credit history is less than perfect. But if you want a competitive interest rate and flexible product features, then there are some simple things you can do leading up to making an application to improve your chances of getting a loan approved. >>
Show a savings history over several months– ie bank statements that show you have been saving money over time. If you are currently renting, your rent may be counted towards your savings history.
>>
Improve your credit rating - if you think you may have a credit rating issue, you are able to get a copy of your credit history and dispute things that are incorrect. Have you defaulted on repayments on any loans, utility bills or phone plans? Or gone over the limit on your credit cards? These things will count against you in a loan assessment, so be upfront about them and the circumstances around each event.
>>
Do you have any loans from short term lenders or multiple credit cards that you don’t use? All of these debts, whether you have drawn down on them or not, are all counted towards your ability to service a loan. If you don’t use them, cancel the loans or credit cards. If you can, repay any other personal debts and close them down prior to making an application.
W H AT ’ S Y O U R E M P L O Y M E N T HISTORY LIKE? It’s a time of flexible working arrangements, which is great for a work life balance, but challenging from a lender’s perspective. To make the application process smoother, provide as much information as you can on your working situation. >>
If you are a PAYG employee, the past few payslips showing a stable income should be all you need. But if you’ve moved jobs often, work part time, recently changed industries or have a component of your income that is commission based – you may need to summarise your situation and provide additional information to support your position.
>>
If you are self-employed, have multiple entities, trusts, partnerships or profit share arrangements, you will need to show how you derive your income.
>>
Do you change jobs often or have you worked in the same industry for some time? It helps to explain anything out of the ordinary about your employment history.
E X P L A I N E R - W H AT C O U N T S A S G E N U I N E S AV I N G S ?
Lenders generally look for consistent additions to savings over a period of at least three months and preferably a year or more. This means that the following are not considered genuine savings: >>
a cash gift
>>
an inheritance
>>
casino/other gambling winnings
>>
proceeds of the sale of a non-investment asset
>>
government grants and other finance
TWO
Look at what you can afford
Your mortgage broker can help you to determine how much you can borrow based on your current income, the purchase price of the property and whether it’s your own home or an investment property.
The amount you are able to borrow largely depends on your ability to repay the loan. There are two key criteria that a lender uses to calculate this amount: 1. The assessment rate - To be prudent in their calculations, lenders factor in a ‘buffer’ so that if interest rates increase significantly, you are still able to repay the loan. This buffer is what is known as the assessment rate and is usually about 2%pa above the standard variable rate. 2. Lenders will calculate your ability to repay the loan based on a Principal and Interest loan (see box over the page). This means that they assume you are paying off the interest, but also the principal (the amount borrowed) of the loan, generally over a 30 year period. Lenders will also take into account the value of the property when determining how much you are able to borrow (see over).
F I X E D R AT E O R VA R I A B L E R AT E L O A N S – W H AT ’ S B E T T E R ? When purchasing a property, borrowers can decide between fixed-rate loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations. The interest rate and therefore the repayments on a variable rate loan will go up and down over the term of your loan based on the underlying rate. Loan repayments and the interest rate on fixed rate loans will remain the same for a fixed period, which is usually 1, 2, 3 or 5 year periods. Choosing a fixed rate loan, which effectively locks in an interest rate and guards against possible future fluctuations, can be attractive. However, fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early. However, locking in the interest rate on your home loan can offer some certainty over the amount of your loan repayments.
P&I OR INTEREST ONLY?
When you make an application, you will be given the option of a Principal and Interest Loan or an Interest only loan. Some things to consider are: >>
Principle and Interest – you are making repayments against both the interest being charged and the amount that you have borrowed (the principal). As a result, generally the total repayments are higher but the interest rate can be lower. The repayment amount is calculated so that over the term of the loan (which could be 20 or 30 years), you will repay all of the loan. This also means that over the term of the loan the total interest paid is less.
>>
Interest Only loan – You only pay off the interest being charged to the loan, so during the interest only period (which is generally 3 or 5 years) you do not pay anything off the principal. Overall repayments are lower, but the interest rate is generally higher. For investment properties this type of loan is generally more tax effective.
THREE What are you buying?
Lenders will value the property according to many factors including: >>
The recent sale of similar properties in your area.
>>
Any improvements that you’ve made.
>>
The location, neighbourhood and any changes which might affect the value.
>>
How easy the property will be to sell.
Lenders look at what you are offering as security for the loan – which usually is the home that you are buying or refinancing. They are particularly interested its value, because if the worse happens and you default on the loan, they are able to sell your property and recoup their losses from the sale proceeds.
The amount you are able to borrow compared to the property's value is known as the Loan to Value ratio (LVR). The Maximum LVR depends on the lender, but say, a rural property, a very small apartment or other more specific properties might have a lower maximum LVR – maybe 50%. However, a standard suburban house at a median price range should have a maximum LVR of 90 - 95% with most lenders. The maximum LVR and also the amount you are able to repay, as we’ve talked about before, will determine how much you can borrow against that particular property.
FOUR The more capital you have, the better
Your capital is the amount that you have to contribute to the purchase. In other words, how much cash do you have to put towards your purchase. This amount should be worked out after you pay the fees, stamp duty and other costs associated with the purchase.
CALLUM AND JUNE BUY A FAMILY HOME Callum and June have made an offer on a family home in Lyons. They are budgeting the following: Purchase price
$780,000
Stamp duty (ACT)*
$25,330
Legal fees and costs
$2,500
Total costs
$807,830
So, not only do they need to get together a deposit, they also need to set aside an amount to cover these additional costs. On top of that, they need to think about moving fees, new furniture, and any repairs they want to make to the house soon after moving in. * They are not eligible for the stamp duty concession and are not first home buyers. This is the estimated stamp duty for 2018/19.
EXPLAINER – LENDER’S MORTGAGE INSURANCE
Most people believe that Lenders Mortgage Insurance (LMI) protects them – but that’s not actually true. LMI actually protects the bank or lender if you default on your loan. This guarantees that the lender will get their money back if the property needs to be sold and there is a shortfall in repaying the loan. It’s an expense that is incurred generally if you borrow more than 80% of the value of the property. For the borrower, it may seem LMI is just another expense to cover. But LMI can mean that some buyers will be able to enter the property market with a much smaller deposit. So think of it as an opportunity cost. Let's look back at Callum and June's situation. To avoid LMI they need a deposit of $156,000 (20% of the purchase price). Plus they need enough to cover the costs and stamp duty. Callum and June may be able to buy the property even if they don’t have $100,000, but they will incur LMI. LMI is a one-off payment, but generally you are able to roll it into the loan amount so that you are paying for it month-by-month along with your mortgage. There can be a big difference in the LMI premiums if you have, for example, a 10 per cent deposit saved compared with a five per cent deposit, so it may well be worth trying to gather together some extra funds. Your mortgage broker or lender can let you know how much LMI you have to pay. It depends on many factors including your deposit, the value of the home, the state you are buying in and the lender.
Did you know?
If you work in a certain industry or if you have certain professional qualifications, you may be able to increase your borrowings to 90% without having to pay LMI. Medical professionals, accountants or members of certain industry bodies are generally eligible for a higher LVR, before they need to pay LMI. Check with your mortgage broker to see if you qualify.
FIVE
Tips for finding the right loan
Think about what you want in a home loan. Do you want lots of flexibility over your repayments and additional features such as an offset account? Or would a simple product suit you just the same? The bells and whistles come at a price, so think carefully before you sign up for a product that’s not quite right.
THE LOWEST I N T E R E S T R AT E IS NOT THE MOST I M P O R TA N T T H I N G
S O P H I S T I C AT E D = EXPENSIVE: CONSIDER A SIMPLE MORTGAGE PRODUCT
Whether you’re a first home buyer, looking to upgrade to your dream home or buying an investment property, it’s essential that you have sound advice – and a plan. You might be able to obtain a low interest rate from a discount broker, but having a well-structured loan with features that give you flexibility can make a big difference in the long run.
When taking out your loan, ask yourself: Do I really need all the bells and whistles?
Many lenders and brokers offer a discount rate to transfer an existing loan, or a honeymoon rate in the first year. But check the fine print! Often, when the discount period finishes you are left with an interest rate that is significantly higher than the standard rate and an uncompetitive loan with high break fees. In other words, what you save in the first year on repayments due to a low interest rate you repay many times over during the life of the loan.
A basic Principal and Interest home loan often has much cheaper fees and a lower interest rate. Homeloans with additional features have an on-going fee while basic loans generally have higher upfront costs but no on-going fee. What features are more important to you – and are you willing to pay additional fees or a higher interest rate for this additional flexibility?
A SHORTER LOAN T E R M C A N S AV E Y O U THOUSANDS Many banks today offer 30 year mortgages, which help home buyers afford the home they want. The loan term and interest rate set the minimum repayment amount, so a longer repayment period means a lower minimum repayment amount. But this structure also benefits the banks as it keeps people in debt longer. A much better strategy is to work out how much you can afford (push yourself a little), calculate how long the term of the loan will be with this repayment amount, and set the loan term accordingly – with a small buffer. For example, if you can afford the repayments on a loan term of 18 years, set the loan term to 20 years rather than the standard 30 years. This will provide the discipline to repay the loan earlier and could save you thousands over the life of the loan.
The loan process
Find out what’s involved in taking out a loan, from start to finish. STEP
ACTION ITEM
WHO?
1
ANALYSING YOUR NEEDS
You Milestone
Meet with Milestone Lending and tell us about yourself. We will help you decide how much you can afford and what type of loan might suit you. If you need to apply for a pre-approval, we can guide you through this process. 2.
Bid on property, purchase off the plan or make an offer. If you are successful, exchange of contracts occurs shortly after so you’ll need to appoint a conveyancing solicitor.
T H I N K A B O U T W H AT F E AT U R E S Y O U REALLY NEED: >>
Ability to make additional repayments
>>
Loan split between fixed and variable rates
>>
Redraw facility for extra repayments you have made
>>
Offset accounts
>>
Repayment holidays
>>
Flexible repayment amounts
>>
Home loan portability (same loan, different property)
MAKE AN OFFER
You Milestone Conveyancer
Generally home insurance on the property is required now. 3.
D E V E L O P A L E N D I N G S T R AT E G Y
Milestone Lending determines a short list of loan options and lenders. You and Milestone discuss and determine a suitable lender/loan.
You Milestone
You will need to sign the application forms and ensure you have all the documents needed for the lender to assess your application. 4.
ASSESSMENT
Lender assesses your application and may ask for additional supporting documents 5
CONTRACTS AND SETTLEMENT
Loan finalised and formal approval received. You will need to sign the loan documents and return them to us or the lender. The Lender and conveyancer prepare for settlement. Do a final inspection of the property a few days before settlement. Once the loans are settled, the property is yours!
Lender Milestone You Lender Milestone You
DONE
USE THE SERVICES OF A PROFESSIONAL There are literally hundreds of different loan products available today. While that does make it harder to choose the right loan, it also means that there is an ideal
STRUCTURE YOUR DEBT FOR A PROSPEROUS FINANCIAL FUTURE The right loan will allow you to still have it all Milestone’s approach looks at all your financial goals – not just how much you can borrow based on the standard questions. We look at your situation in detail to make sure the loan you take on meets your needs now and into the future.
Milestone’s dedicated mortgage brokers can help you with loans for: >>
Your dream home
>>
Your first home
>>
Investment properties
>>
Construction and renovation
>>
Business and commercial properties
>>
SMSF loans
For more information about finding the right loan for you, contact Milestone Lending Solutions on (02) 6176 3110, email us at info@milestonelending.com.au or visit our website milestonelending.com.au.
lending solution for you out there. It’s just a matter of finding it. And that’s where a professional mortgage broker comes in. A mortgage broker will help you navigate the different lenders and loan options available. They will also help you work out which features you really need and which ones you can do without. This can save you both money and time. Remember that your situation might not fit the norm – you may have a low deposit, be a small business owner or have a complex personal situation that impacts your finances. A mortgage broker can look at these factors and determine which lender will best be able to meet your needs.
Milestone Financial Services ABN 68 100 591 508 trading as Milestone Lending Solutions is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licencee 232706. This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Milestone Financial Services Pty Ltd and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/ or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information on (02) 6102 4333.